Walker v. Action Industries, Inc.

The fiscal year of Action Industries, Inc. (Action) (defendant) was July through June each year. As part of its ordinary-course operations, Action’s management produced various internal weekly, monthly, and quarterly financial projections, including sales and revenue forecasts. During May 1982, Action’s internal financial projections showed a significant increase in orders and sales for the first quarter of fiscal 1983. Subsequent internal projections in early July 1982 (the start of the 1983 fiscal year for Action) indicated similar projected results. On July 16, 1982, Action launched a tender offer for its own stock at $4 per share. Action filed a tender-offer statement with the Securities and Exchange Commission (SEC) that included disclosure of the SEC required audited financial statements for completed fiscal years 1979 through 1981 and unaudited interim financial statements for fiscal year 1982 through March 1982. The interim financial statements for 1982 showed a net loss of approximately $4 million through March 27, 1982, as compared to the prior year’s net earnings of approximately $1 million over the same span. The tender offer statement included a disclosure stating that after March 27, 1982, as compared to 1981, Action expected sales to increase but for earnings to decrease because of rising expenses. The tender-offer statement did not disclose any of Action’s internal financial projections. The tender offer closed on August 6, 1982. After the tender offer closed, Action’s internal projections continued to forecast a significant increase in sales. On August 18, 1982, Action issued a press release that announced its fiscal year-ended 1982 audited financials were complete. As indicated in the tender-offer statement, the press release stated that for fiscal 1982, sales had increased over 1981 but earnings had decreased due to higher expenses. The press release did not, however, disclose any internal projections. On September 21, 1982, Walter Walker (plaintiff) sold his shares of Action for approximately $5.25 per share. On October 28, 1982, Action announced its interim financial statements for fiscal 1983, which showed a 75 percent increase in sales and a significant increase in net earnings. Following the announcement, Action’s stock increased and, by November 12, 1982, had risen to $15.75 per share. Walker sued Action, alleging that Action had violated SEC Rule 10b-5 by failing to disclose financial projections in the tender-offer statement and August 18 press release. A jury ruled in favor of Action, and Walker appealed.